Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition

31 Pages Posted: 6 May 2003

See all articles by Uwe Walz

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Leibniz Institute for Financial Research SAFE

Bernd Woeckener

University of Tuebingen - Department of Economics

Date Written: March 2003

Abstract

This Paper analyses the compatibility decisions of two regional monopolistic suppliers of a network-effect good who first build up installed bases in their respective home region and then compete in a third market. We show that with weak network effects, installed home bases always are higher under compatibility and suppliers always opt for compatibility. With strong network effects, home markets are covered, and given a sufficiently high home-market size advantage both the favoured supplier and a regional standardization body maintain incompatibility in order (to enable the supplier) to monopolize the third market via limit pricing. As incompatibility always results in a welfare loss, this is a strong case for a global standardization body.

Keywords: Compatibility decisions, installed home base, international network effects, third-market competition, standardization bodies

JEL Classification: F12, L15

Suggested Citation

Walz, Uwe and Woeckener, Bernd, Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition (March 2003). Available at SSRN: https://ssrn.com/abstract=402821

Uwe Walz (Contact Author)

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Bernd Woeckener

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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